New deal or no deal.

As I posted earlier today, it seems all too likely that a “fair price” for mortgage-related assets will still leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?…

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I would guess that this has to be one of the biggest peacetime transfers of power from Congress to the Administration in history. (Anyone know?). Certainly one of the most concise.

It’s certainly both brief and expansive. The Secretary of the Treasury may purchase mortgage-related assets, and hire people to help him do it, and designate agents to do it, pretty much insofar as he pleases, up to $700,000,000,000, beholden to nobody and subject to no review, for the next two years.

Compare for example the Reconstruction Finance Corporation, created in January 1932, at 47 Stat. 5, and authorized to loan to pretty much any lending agency as it pleased, with not more than $200,000,000 for the relief of banks closed or in the process of liquidation. All loans had to be secured, couldn’t be made on foreign securities or acceptances, no more than 5% of the money could go to any one company, couldn’t exceed three years’ term, couldn’t pay fees or commission to applicants for loans, and so forth. Railroads accepting such loans had to do so under terms acceptable to the regulatory Interstate Commerce Commission.

The law in addition made provision for winding up the Corporation when appropriate and requiring it to report quarterly to the Congress on its activities and employees.

In short, although the situation in January of 1932 was visibly more dire than it is now, Congress was less willing to hand over utter independent authority to the Hoover administration.

With Roosevelt, Congress was a bit more trusting of the executive. Compare the National Recovery Act, of June 1933, at 48 Stat. 195. Here,

the President is hereby authorized to establish such agencies, to accept and utilize such voluntary and uncompensated services, to appoint, without regard to the provisions of the civil service laws, such officers and employees, and to utilize such Federal officers and employees, and, with the consent of the State, such State and local officers and employees, as he may find necessary, to prescribe their authorities, duties, and responsibilities, and tenure, and, without regard to the Classification Act of 1923, as amended, to fix the compensation of any officers and employees so appointed….

The President may delegate any of his functions and powers under this title to such officers, agents, and employees as he may designate or appoint, and may establish an industrial planning and research agency to aid in carrying out his functions under this title.

It’s worth noting (a) the Supreme Court found this blanket grant unconstitutional; (b) the agency created under these provisions, the National Recovery Administration, is generally held to have been a bad idea partly because of its ill-defined mission and was basically defunct by the time the Court got to it, because other parts of the law and other laws had let the Roosevelt administration create other, better defined and more successful agencies for recovery.

As for (a) I’ve no reason to believe the Supreme Court would today shoot down blanket emergency authority the way the Court of 1935 did; as for (b) I expect Henry Paulson to be a better administrator than Hugh Johnson.

But more broadly, do you think this Congress should be more trusting of the Bush administration than the 1932 Congress was of the Hoover administration? Conversely, do you think the Bush administration deserves the same level of trust from this Congress as the Roosevelt administration? Even the giant relief bill of 1935, which gave Roosevelt around $5bn, had more strings attached than this law.

Even given this level of trust, how about what Krugman calls a “quid pro quo” for us, the taxpayers? New deal or no deal.

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17 comments

It staggers my mind that this Congress can accept the word of any official in this administration on any subject marked “urgent.” We’ve spent what, a half trillion in Iraq? Last time I checked, we were still a few WMD’s short of the trust threshold, I’d say. I wouldn’t want the proof to be a mushroom cloud and all, but I’m starting to think the “financial meltdown” talk is being ginned up by the administration.

Moreover, the president who has done more than any other to create these problems shouldn’t be in charge of fixing them. Congress should seize the authority. But they won’t, because they’re foolish and weak.

anyone who earned more than two million a year for any of the last eight years has to pay into the treasury every dollar they made over two million.

every dollar between the median household income and the two million is taxed at 60%.

unless they voted republican, in which case it is confiscated outright.

this entire administration has been one giant asset-stripping operation from day one. take over the entire country, use its resource for personal pleasure and personal enrichment, sell off anything valuable for personal gain, and leave the tax-payers holding the bag. the fact that this is happening once again, four months before the end of the whole nightmare, is just beyond belief.

this entire nation is several trillion dollars poorer now than when bush stole the first election. some of those trillion dollars went up in smoke. but a lot of them went into his friends’ pockets. we should do whatever it takes to get restitution.

I think we need to see this crises as bigger than the stock market meltdown of 1929. Why? The US economy is many times larger after World War II than it was after World War I. This staggering amount of $750,000,000,000 doesn’t give the whole cost of the emergency bailout costs to our ecomony.

In my mind I see this as the largest financial crises ever to hit our economy since the Civil War!

Finally, few people are talking about derivatives and hedge funds and other “money for nothing” instruments which hold $64 trillion in assets until they pay off. This unregulated gambling is also behind the current money squeeze.

I’m generally an optimist, but part of me feels that the republic is dying. Elite opinion trumps popular opinion on every important issue: war, finance, etc. In this sense, it’s the opposite of the New Deal, which was a mass uprising, mediated by the Democratic Party. Yes, FDR assumed powers that seemed scary to some, but his authority was widely supported by the overwhelming majority of people.

That said, as you suggest, the Paulson plan seems constitutional. First, NIRA fell because it handed the president legislative authority, namely the power to write codes that had the force of law. That’s not what’s happening here. Second, Congressional power to tax and spend during emergencies was unfettered even during the Gilded Age. Third, any economic sector designated essential to public welfare falls under the legislature’s police power. For instance, the state has always had the power to regulate food.

To answer the questions of trust posed at the bottom of the article, Bush is delegating this one. It is more a matter of trusting Paulson and Bernanake. I think that congress does trust their judgment and believes that they are not just blowing smoke. Where trust is a real problem however is with congress itself. They don’t trust one another. If they did, they would agree to pass a bill on a promise to one another that the additional measures, to bail out homeowners in over their heads and clip the wings of corporate high flyers with their golden parachutes, would come later. But they can’t count on keeping their promises to one another, so they’re going to hold the bill hostage this week as they fight their ideological battles over it.